As an entrepreneur with your own business, you may have roughly three reasons for offering a participation. You are looking for money to finance your growth, you need additional capital to strengthen your financial position, or you are already bringing in your successor.
1. Financing for (rapid) growth
To grow your business, you need money. And fast-growing businesses actually have to incur a lot of costs to finance business growth. Rapid business growth also causes a rapid need for capital. To finance the growth of your business, you can sell a portion of your shares (which is what publicly traded businesses do to finance), offer a stake. The advantage is that many types of buyers are only too happy to step into a fast-growing business.
2. Need capital to strengthen financial position
Sometimes, as an entrepreneur, you run into an urgent cash problem. For those entrepreneurs, it may be an interesting option to strengthen their financial position by selling a (minority) stake to an investor or a strategic buyer. Because that's the good news: there is still plenty of money available from wealthy individuals (informal investors), investment companies and larger (family) businesses.
Moreover, these parties - besides money - also bring useful knowledge, experience and an interesting network. Such a participation is a direct capital injection, which also significantly increases the chances of getting an additional loan from the bank as well.
3. Preparing to say goodbye: pre-exit
If you feel that you are not yet finished with your business but could use some help, consider selling a part of your business to a partner (who is also your future successor). Doing business on your own can be a lonely existence. Besides, selling your business is not an all-or-nothing game.
Indeed, nowadays it is difficult to sell your business in one fell swoop to an MBI'er, for example, because they simply don't have (or get) the financial resources from financiers for a full acquisition. With such a pre-exit, you already sell part of your business to a buyer, pull together for a while and then sell your remaining share package to him or her with peace of mind.
Equity transaction: minority or majority stake?
Basically, participating in an existing business involves a stock transaction, as the participant becomes a co-shareholder in the business. The big question is how much of the stock package the selling entrepreneur wants to sell. The answer is related to the capital needs and valuation of the business. The more money you ask from a participant, the more shares you have to give away. This sounds logical, but is more recalcitrant in practice.
Capital requirement
Step 1 is to calculate your capital needs. But determining your capital requirement is not simple arithmetic: if you do it professionally, you have to deal with an operating budget, a liquidity budget and an investment budget. Get help from an accountant or financial expert in preparing well-founded financial statements. They have dealt with this before and their experience is a welcome reinforcement to convince a participant in the financial field.
2. Valuation of the business
Once you have calculated what your capital needs are, the question arises as to what percentage of shares you will give up in exchange. To arrive at that answer, you must first determine the value of your business. And that is one of the most difficult questions. Because there is no standard calculation formula where after entering a few numbers an unambiguous figure rolls out.
3. Equity interest
Suppose it turns out that your business is worth 1,000,000 euros and you have a capital requirement of 200,000 euros. Then the offered equity stake for the participant is 20%.
When you are looking for your successor for your business who is partially buying in, you don't speak so much of a capital need. Buyer and seller then want the buyer to buy in slowly. You can then use the following construction: suppose the price of the business is 100. Buyer and seller establish a limited liability company that pays the purchase price. The buyer brings in 20, the seller leaves 30, and the bank finances 50. The logical share split then seems to be 40% for the buyer and 60% for the seller. But you want to hand over the baton, so in such a deal it is not strange that the buyer gets an equity stake of, say, 60% and the seller a minority stake of 40%.
However, that does not mean that the person with a majority of the shares can also do whatever he wants. You often see in practice that it is agreed between the parties that a qualified majority is required for weighty decisions. The seller, for example, owns 35% of the shares and demands that a majority of two-thirds of the shares be required for certain decisions, effectively giving him a veto right. These include matters such as taking out loans, appointing board members or making heavy investments.
